Enterprise Resource Planning

MODULE NO. 4

A.
TOPICS LEARNING OBJECTIVES
PRODUCTION AND SUPPLY CHAIN MANAGEMENT INFORMATION
SYSTEMS
 After completion of this lesson the student
will be able to understand:
 Describe the steps in the production
planning process of a high-volume
manufacturer
 Describe Fitter Snacker’s production
and materials management
Problems
 Explain how a structured supply chain
management planning process
enhances efficiency and decision
making
 Understand how production planning
data in an ERP system can be
shared with suppliers to increase
supply chain efficiency

B. DISCUSSION

PRODUCTION OVERVIEW

To efficiently meet customer demand, Fitter must develop an estimate of customer demand, and then
develop a production schedule to meet that forecasted demand. Developing a production plan is a
complicated task, but the end result answers two simple questions:
• How many of each type of snack bar should we produce, and when?
• What quantities of raw materials should we order so we can meet that level of production, and when
should they be ordered?

Developing a good production plan is just the first step: Fitter must also be able to execute the plan
and make adjustments when customer demand does not meet the forecast. An ERP system is a good
tool for developing and executing production plans because it integrates the functions of production
planning, purchasing, materials management/warehousing, quality management, sales, and
accounting. To support even better supply chain management, companies can connect ERP systems to
supplier and customer information systems as well.

The goal of production planning is to schedule production economically so a company can ship goods
to its customers by the promised delivery dates in the most cost-efficient manner. There are three
general approaches to production:
• Make-to-stock—Items are made for inventory (the “stock”) in anticipation of sales orders; most
consumer products (for example, cameras, canned corn, and books) are made this way.
• Make-to-order—Items are produced to fill specific customer orders; companies usually take this
approach when producing items that are too expensive to keep in stock or items that are made or
configured to customer specifications. Examples of make-to-order items are airplanes and large

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industrial equipment.
• Assemble-to-order—Items are produced using a combination of make-to stock and make-to-order
processes; the final product is assembled for a specific order from a selection of make-to-stock
components. Personal computers are a typical assemble-to-order product.

Fitter’s Manufacturing Process

The snack bar production line can produce 200 bars per minute—or 12,000 bars per hour. Each bar
weighs 4 ounces, which means the line produces 48,000 ounces (or 3,000pounds) of bars per hour.
The entire production line operates on one shift a day.

Fitter’s Production Sequence

Raw materials are taken from the warehouse to one of four mixers. Each mixer mixes dough in 500-
pound batches. Mixing a batch of dough requires 15 minutes of mixing time, plus another 15 minutes
to unload, clean, and load the mixer for the next batch of dough; therefore, each mixer can produce
two 500-pound batches of dough per hour. That means the four mixers can produce a total of 4,000
pounds of dough per hour more than the production line can process. Because only three mixers need
to be operating at a time to produce 3,000 pounds of snack bars per hour, a mixer breakdown will not
shut down the production line.

After mixing, the dough is dumped into a hopper (bin) at the beginning of the snack bar production
line. A forming mechanism molds the dough into bars, which will weigh 4 ounces each. Next, an
automated process takes the formed bars on a conveyor belt through an oven that bakes the bars for 30
minutes. When the bars emerge from the oven, they are individually packaged in a foil wrapper, and
each group of 24 bars is packaged into a display box. At the end of the snack bar line, display boxes
are stacked on pallets (for larger orders the display boxes are first packed into shipping boxes, which
are then stacked on the pallets).

Switching the production line from one type of snack bar to the other takes 30 minutes— for cleaning
the equipment and changing the wrappers, display boxes, and shipping cases. Each night, a second
shift of employees cleans all the equipment thoroughly and sets it up for the next day’s production.
Thus, changing production from NRG-A on one day to NRG-B the next day can be done at the end of
the day without a loss of capacity. (Capacity is the maximum amount of bars that can be produced.)
On the other hand, producing two products in one day results in a half-hour loss of capacity during the
changeover.

Fitter’s Production Problems

Fitter has no problems making snack bars, but it does have problems deciding how many bars to make
and when to make them. The manufacturing process at Fitter suffers from a number of problems,

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ranging from communication breakdowns and inventory issues to accounting inconsistencies, mainly
stemming from the unintegrated nature of its information systems.

Communication Problems
Communication breakdowns are an inherent problem in most companies, and they are magnified in a
company with an unintegrated information system. For example, at Fitter, Marketing and Sales
personnel do a poor job of sharing information with Production personnel. Marketing and Sales
frequently excludes Production from meetings, neglects to consult Production when planning sales
promotions, and often fails to even alert Production of planned promotions. Marketing and Sales also
typically forgets to notify Production when it takes an exceptionally large order.

When Production must meet an unexpected increase in demand, several things happen. First,
warehouse inventories are depleted. To compensate, Production must schedule overtime labor, which
results in higher production costs for products. Second, because some materials (such as ingredients,
wrappers, and display boxes) are custom products purchased from a single vendor, a sudden increase
in sales demand can cause shortages or even a stock out of these materials. Getting these materials to
Fitter’s plant might require expedited shipping, further increasing the cost of production. Finally,
unexpected spikes in demand result in high levels of frustration for Production staff. Production
personnel are evaluated on their performance—how successful they are at controlling costs, keeping
manufacturing lines running, maintaining quality control, and operating safely. If they cannot keep
production costs down, Production staff receive poor evaluations. Managers are especially frustrated
when an instant need for overtime follows a period of low demand. With advance notice of a product
promotion by Marketing and Sales, Production could use slack periods to build up inventory in
anticipation of the increase in sales.

Inventory Problems
As noted earlier, Fitter’s week-to-week and day-to-day production planning is not linked in a
systematic way to expected sales levels. When deciding how much to produce, the production
manager applies rules developed through experience. Her primary indicator is the difference between
the normal amount of finished goods inventory that should be stocked and the actual inventory levels
of finished goods in the warehouse. Thus, if NRG-A or NRG-B inventory levels seem low, the
production manager schedules more bars for production. However, she does not want too many bars in
inventory because they have a limited shelf life. Her judgment is also influenced by the information
she hears informally from people in Marketing and Sales about expected sales levels.

The production manager’s inventory data are maintained in an Access database. Data records are not
updated in real time and do not flag inventory that has been sold but not yet shipped. (Such inventory
is not available for sale, of course, but employees cannot determine this by looking at the database;
thus, workers do not know the level of inventory that is available to ship at any given moment). This is
problematic if the Wholesale Division generates unusually large orders or high volumes of orders. For
example, two large Wholesale Division orders arriving at the same time can deplete the entire
available inventory of NRG-A bars. If Production is manufacturing NRG-B bars at that time, it must
halt production of those bars so it can fill the orders for NRG-A. This means delaying production of
NRG-B bars and losing production capacity due to the unplanned production changeover.

The production manager lacks a systematic method not only for meeting anticipated sales demand, but
also for adjusting production to reflect actual sales. Marketing and Sales does not share actual sales
data with the Production Department, partly because this information is hard to gather on a timely
basis and partly because of a lack of trust between the Sales and Production departments (as a result of
prior negative experiences). If Production had access to sales forecasts and real-time sales order
information, the manager could make timely adjustments to production, if needed. These adjustments
would allow inventory levels to come much closer to what is actually needed.

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Accounting and Purchasing Problems
Production and Accounting do not have a good way to calculate the day-to-day costs of Fitter’s
production. Manufacturing costs are based on the number of bars produced each day, a number that is
measured at the end of the snack bar production line. For the purpose of figuring manufacturing costs,
Fitter uses standard costs, which are the normal costs of manufacturing a product; standard costs are
calculated from historical data, factoring in any changes in manufacturing that have occurred since the
collection of the historical data. For each batch of bars it produces, Fitter can estimate direct costs
(materials and labor) and indirect costs (factory overhead). The number of batches produced is
multiplied by the standard cost of a batch, and the resulting amount is charged to manufacturing costs.

Most manufacturing companies use standard costs in some way, but the method requires that
standards be adjusted periodically to conform with actual costs. Fitter’s actual raw material and labor
costs often deviate from the standard costs, in part, because Fitter is not good at controlling raw
materials purchases. The production manager cannot give the purchasing manager a good production
forecast, so the purchasing manager works on two tracks: First, she tries to keep raw materials
inventories high to avoid stock outs. Second, if she is offered good bulk quantity discounts on raw
materials such as oats, she will buy in bulk, especially for items that have long lead times for delivery.
These purchasing practices make it difficult both to forecast the volume of raw materials that will be
on hand and to calculate an average cost of the materials purchased for profitability planning. Fitter
also has trouble accurately forecasting the average cost of labor for a batch of bars because of the
frequent need for overtime labor.

Thus, Production and Accounting must periodically compare standard costs with actual costs and then
adjust the accounts for the inevitable differences, which is always a tedious and unpleasant job. The
comparison should be done at each monthly closing, but Fitter often puts it off until the closing at the
end of each quarter, when its financial backers require legitimate financial statements. The necessary
adjustments are often quite large, depending on production volumes and costs during the quarter.

THE PRODUCTION PLANNING PROCESS

In this section, you will examine a systematic process for developing a production plan that takes
advantage of an ERP system. Spreadsheet calculations are presented to explain and illustrate the key
steps, and the corresponding screens in the SAP ERP system follow the spreadsheet data.

Production planners are employees who interact with the inventory system and the
sales forecast to determine how much to produce. Planners follow three important
principles:

• Using a sales forecast, and taking into account current inventory levels, create an aggregate
(combined) production plan for all products. Aggregate production plans help to simplify the planning
process in two ways: First, plans are made for groups of related products rather than for individual
products. Second, the time increment used in aggregate planning is frequently a month or a quarter,
while the production plans that will actually be executed operate on a daily or weekly basis. Aggregate
plans should consider the available capacity in the facility.
• Break down the aggregate plan into more specific production plans for individual products and then
into smaller time intervals.
• Use the production plan to determine raw material requirements.

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The SAP ERP Approach to Production Planning

• Sales forecasting is the process of predicting future demand for a company’s products.
• Sales and operations planning (SOP) is the process of determining what the company will produce.
In the diagram, the Sales forecasting and Starting inventory levels are inputs to this process. At first
glance, it might seem that a company should just make products to match forecasted sales, but
developing the production plan is often more complicated than that because capacity must be
considered. Many products have seasonal demand, and to meet demand during peak periods,
production planners must decide whether to build up inventory levels before the peak demand,
increase capacity during the peak period, subcontract production, or use some combination of
these approaches.
• In the Demand management step, the production plan is broken down into smaller time units, such as
weekly or even daily production figures, to meet demand for individual products.
• The Materials requirements planning (MRP) process determines the amount and timing of raw
material orders. This process answers the questions: “What raw materials should we be ordering so we
can meet a particular level of production?” and “When should we order these materials?”
• In the Purchasing step, the quantity and timing information from the MRP process is used to create
raw materials purchase orders, which are
transmitted to qualified suppliers.
• The Detailed scheduling process uses the production plans developed during the demand
management step as an input for a production schedule. The detailed scheduling method used depends
on the manufacturing environment. For Fitter, the detailed production schedule will determine when
the production line will switch between the NRG-A and NRG-B bars.
• The Production process uses the detailed schedule to manage daily operations, answering the
questions: “What should we be producing?” and “What staffing do we need to produce those
products?”

Sales Forecasting
Currently, Fitter Snacker has no formal way of developing a sales forecast and sharing it
with Production. SAP’s ERP system would allow it to take an integrated approach to sales

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forecasting. Whenever a sale is recorded in SAP’s ERP Sales and Distribution (SD) module, the
quantity sold is recorded as a consumption value for that material. These consumption values can be
updated on a weekly or monthly basis, as desired. If more detail is needed, the Logistics Information
system that is part of SAP ERP can record sales with more detail (for example, by region or sales
office), or data can be stored in the separate Business Warehouse (BW) system for more detailed
analysis. With an integrated information system, accurate historical sales data are available for
forecasting.

The sales data in Figure are for shipping cases, which contain 12 display boxes with 24 bars each, for
a total of 288 bars. Note in Figure that the forecast starts with the previous year’s sales levels, to
reflect Fitter’s seasonal sales fluctuations (sales are higher in the summer when more people are
active). Also note that there was a special marketing promotion last year. The estimated impact of this
promotion was an increase in sales of 300 cases for May and June. To get accurate base figures for
last year’s sales, this promotional increase must be subtracted from the previous year’s sales numbers.
Fitter’s Marketing and Sales Department anticipates a 3 percent growth in sales over last year, based
on current trends and on research reported in trade publications. In addition, Fitter will be launching a
special marketing promotion at the end of May to increase sales at the beginning of the summer
season. As shown in Figure, Fitter marketing experts think the promotion will result in a sales increase
of 500 cases for June.

Sales and Operations Planning

Sales and operations planning (SOP) is the next step in the production planning process. The input to
this step is the sales forecast provided by Marketing and Sales. The output is a production plan
designed to balance demand with production capacity. The production plan becomes the input to the
next step, demand management. The goal is to develop a production plan that meets demand without
exceeding capacity and that maintains “reasonable” inventory levels (neither too high nor two low).

This process requires judgment and experience. A sales and operations plan is developed from a sales
forecast, and it determines how Manufacturing can efficiently produce enough goods to meet
projected sales. In Fitter’s case, there is no way to make this determination, because Fitter does not
produce a formal estimate of sales. If Fitter had an ERP system, the calculation would be done as
described here.

We know that Fitter can produce 200 bars per minute, so we can estimate the
production capacity required by the sales forecast. Figure below shows Fitter’s sales and
operations plan for the first six months of the year.

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The first line in Figure is the sales forecast, which is the output of the sales
forecasting process. The next line is the production plan, which the production planner develops—in a
trial-and-error fashion—by observing the effect of different production quantities on the lines in the
spreadsheet that calculate inventory levels and capacity utilization (the amount of plant capacity that is
being consumed).

The third line, inventory, calculates what the inventory should be based on the previous periods
inventory, sales forecast, and production plan. The plan in this example assumes an inventory of 100
cases as of the end of December. Adding production of 5,906 cases to this inventory and subtracting
the forecast sales of 5,906 cases will leave an inventory of 100 cases at the end of January, if things go
according to plan. The production planner has developed a plan that maintains a minimum planned
inventory of approximately 100 cases. This inventory, called safety stock, is planned so if sales
demand exceeds the forecast by no more than 100 cases, sales can be met without altering the
production plan. Notice that in May, the production plan is greater than the May sales forecast and the
inventory is 274. Why? Because the planner wants to build up inventory to handle the increased
demand in June, which results from the normal seasonal increase in snack bar sales and additional
demand from the planned promotional activities.

The fourth line shows the number of working days in a given month, an input based on the company
calendar. Using the number of working days in a month, the available capacity each month is
calculated in terms of the number of shipping cases:

• 200 bars per minute × 60 minutes per hour × 8 hours per day = 96,000
bars per day
• 96,000 bars per day ÷ 24 bars per box ÷ 12 boxes per case = 333.3 cases
per day
• Multiplying the number of working days in a month times the production capacity of 333.3 shipping
cases per day gives you the monthly capacity in shipping cases, which is shown in line 5.

With the available capacity (assuming no overtime) now expressed in terms of shipping cases, it is
possible to determine the capacity utilization for each month by dividing the production plan amount
(line 2) by the available capacity (line 5). The result is expressed as the utilization percentage (line 6).
This capacity calculation shows whether Fitter has the capacity necessary to meet the production plan.
While higher levels of capacity utilization mean that Fitter is producing more with its production
resources, this percentage must be kept below 100 percent to allow for production losses due to
product changeovers, equipment breakdowns, and other unexpected production problems. The
sales and operations plan in Figure shows that Fitter’s highest level of capacity utilization is 95
percent in May and June.

The last step in sales and operations planning is to disaggregate the plan, that is, to break it down into
plans for individual products. Lines 7 and 8 in Figure disaggregate the planned production shown in
line 2, based on the breakdown of 70 percent NRG-A and 30 percent NRG-B snack bars. This 70/30

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breakdown was established using previous sales data for these products. The monthly production
quantities in lines 7 and 8 are the output of the sales and operations planning process, and they are the
primary input to the demand management process.

The monthly production quantities (in lines 7 and 8 of Figure) create some inventory in May to meet
June’s sales; in addition, some overtime production is likely in May and June because capacity
utilization is over 90 percent.

This example illustrates the value of an integrated system: it provides a tool for incorporating data
from Marketing and Sales and Manufacturing and for evaluating different plans. Whereas Marketing
and Sales may want to increase sales, the company might not increase its profits if overtime costs or
inventory holding costs are too high. This sort of planning is difficult to do without an integrated
information system, even for small companies like Fitter. Having an integrated information system
helps managers of all functional areas meet corporate profit goals.

Sales and Operations Planning in SAP ERP

In SAP ERP, the sales forecast can incorporate historical sales data from the Sales and Distribution
(SD) module, or the forecast can be created using input from plans developed in the Controlling (CO)
module. In the CO module, profit goals for the company can be set, which can then be used to
estimate the sales levels needed to meet the profit goals.
Figure shows the sales and operations planning screen from the SAP ERP system. The title of this
screen is “Create Rough-Cut Plan.” Rough-cut planning is a common term in manufacturing for
aggregate planning. As described above, rough-cut plans are disaggregated to generate detailed
production schedules.

Sales and operations planning in SAP ERF

 The sales forecast is entered in the first row (Sales) of the rough-cut plan. Data can be entered
manually by the user, a sales forecast can be transferred from a profitability analysis
performed in the CO module, or the user can perform a forecast in this screen, calling up
historical sales data from the SAP ERP system.

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 The second row, Production, represents the production that is planned to meet the sales
forecast. Production figures can also be entered manually, or the SAP system can generate
values that meet sales goals.
 The third row shows inventory as the Stock level. The gray shading of that row indicates it is
a calculated result.
 The fourth row allows for the entry of a Target stock level. If the user enters a value in this
row, then SAP ERP will propose production levels to meet the Target stock level.
 Once the Target stock level is entered, the system will calculate the number of days’ worth of
supply, so the fifth row (Days’ supply) is a calculated result.
 The sixth row lets the user specify a target stock level in terms of the number of days of
demand it would cover, known as Target days’ supply. The SAP system uses the factory
calendar, which specifies company holidays and planned shutdowns, to determine the number
of working days in a month when calculating the Target days’ supply.

If the sales plan is to be developed using forecasting tools, the SAP ERP system can provide
the planner with historical sales values based on sales data stored in the system. Without an
integrated system such as SAP, the planner would likely have to request sales figures from the
Sales Department, and he or she might not be sure how accurate the data were. Figure below
shows how the SAP ERP system displays historical sales figures.

Historical sales figures in SAP

In addition to providing the historical sales values from the Sales and Distribution module,
this screen allows the planner to “correct” the sales values. For example, sales may have been
low in the past due to unusual weather conditions, or the planner might know that sales would
have been higher if the company was able to meet all the demand. The sales figures used for
forecasting should represent the best estimate of what demand was in the past, not necessarily
what the actual sales were.

The SAP ERP system can automatically graph these data to help the planner determine if
there are any unusual patterns in the historical sales values that require investigation. The

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planner can correct these values as well, to adjust sales values that were unusually high or
low, or to back out (or subtract) the effects of previous sales promotions.
After the sales forecast is made, it can be adjusted to incorporate increased sales from
planned sales promotions.

Disaggregating the Sales and Operations Plan in SAP ERP

As mentioned previously, companies typically develop sales and operations plans for product
groups. Product groups are especially important for companies that have hundreds of
products, because developing unique plans for hundreds of individual products is extremely
time consuming. Furthermore, it would be hard to develop that many different plans in a
coordinated fashion while also taking in consideration production capacity. Fitter’s product
group is very simple; 70 percent of the group consists of NRG-A bars, and 30 percent consists
of NRG-B bars.

When the sales and operations plan is disaggregated, the production plan quantities specified
for the group are transferred to the individual products that make up the group, according to
the percentages defined in the product group structure.

Demand Management
The demand management step of the production planning process links the sales and
operations planning process with the detailed scheduling and materials requirements planning
processes. The output of the demand management process is the master production schedule
(MPS), which is the production plan for all finished goods. For Fitter, the master production
schedule is an input in the detailed scheduling process, which determines which bars the
company should make and when it should make them. The master production schedule is also
an input to the materials requirements planning process, which determines what raw materials
to order to support the production schedule.

The demand management process splits Fitter’s monthly production planning values into finer
time periods. Figure below shows January’s production plan by week and by day.

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Fitter will use the weekly plan for purchasing materials management. Daily plans will be used
for the product(s) that are to be produced on the snack bar line. To get the results shown in
Figure, the following calculations were performed:
• For the weekly plan, the MPS plan for NRG-A bars in Week 1 was calculated as: (4,134
cases in January [the monthly demand from Figure 4-5] ÷ 21 working days in month of
January) × 5 working days in Week 1 = 984.3 cases per week.
This figure was rounded to 984 cases.
• Because Week 5 consists of the last day in January and the first four days in February, the
MPS for NRG-A bars in Week 5 was calculated as:
• (4,134 cases in January [monthly demand] ÷ 21 working days in month of January) × 1
working day in Week 5 = 196.9 cases
• (4,198 cases in February [monthly demand] ÷ 20 working days in month
of February) × 4 working days in Week 5 = 839.6 cases
• Week 5 Total = 196.9 + 839.6 = 1,036.5 cases

Materials Requirements Planning (MRP)

Materials requirements planning (MRP) is the process that determines the quantity and timing
of the production or purchase of subassemblies and raw materials required to support the
master production schedule. The materials requirements planning process answers the
questions, “What quantities of raw materials should we order so we can meet that level of
production?” and “When should these materials be ordered?”
In this section, you will see how Fitter could accurately plan its raw materials purchases if it
had an ERP system.
In Fitter’s case, all product components (ingredients, snack bar wrappers, and display
boxes) are purchased, so the company could use the materials requirements planning
process to determine the timing and quantities for purchase orders. To understand
materials requirements planning, you must understand the bill of material, the material’s
lead time, and the material’s lot sizing.

Bill of Material
The bill of material (BOM) is a list of the materials (including quantities) needed to make
a product.

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Lead Times and Lot Sizing
The BOM can be used to calculate how much of each raw material is required to produce
a finished product. Determining the timing and quantity of purchase orders, however, requires
information on lead times and lot sizing. For example, if a manufacturer orders a make-to-
stock item, the lead time is the cumulative time required for the supplier to receive and
process the order, take the material out of stock, package it, load it on a truck, and deliver it to
the manufacturer. The manufacturer might also include the time required to receive the
material into its warehouse (unloading the truck, inspecting the goods, and moving the goods
into a storage location).

Lot sizing refers to the process of determining production quantities (for raw materials
produced in-house) and order quantities (for purchased items).

Materials Requirements Planning in SAP ERP

The MRP list in SAP ERP looks very much like a Stock/Requirements List, which you saw
in Figure (for NRG-A bars). The MRP list shows the results of the MRP calculations, while
the Stock/Requirements List shows those results plus any changes that have occurred since the
MRP list was generated (planned orders converted to purchase orders or production orders,
material receipts, and so on). Because the materials requirements planning calculations are
time consuming to process for a company producing hundreds of products using thousands of
parts, the materials requirements planning process is usually only repeated every few days—
or perhaps weekly. The Stock/Requirements List, however, allows the users of the system to
see what is happening (and what will happen) with a material in real time

The MRP list in the third column of Figure 4-18 shows purchase orders (POItem), planned
orders (PldOrd), and dependent requirements (DepReq). Dependent requirements represent
the demand for oats created by the planned orders for snack bars—the demand for oats

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 depends on the production plans for snack bars. The materials requirements planning process
creates planned orders to meet these dependent requirements. The planned orders are
recommendations by the system to create orders (in this case, purchase orders) for oats.

The Stock/Requirements List shown in Figure 4-19 shows purchase orders (POitem), planned orders
(PldOrd), and dependent requirements (DepReq), but it also shows purchase requisitions (PurRqs).
When a planner decides that it is time for a planned order to become a purchase order, the planned
order is converted to a purchase requisition, which is a request to Purchasing to create a purchase
order. The planner can convert a planned order to a purchase requisition from the Stock/Requirements
List screen by double-clicking the planned order line.

From this window, the planner can create a purchase requisition or review the planned order and make
changes before creating the requisition. SAP ERP also provides the ability to mass-process planned
orders by converting groups of planned orders to purchase orders simultaneously. The materials
requirements planning process can also be configured to automatically create purchase requisitions;
for example, all planned orders created within one week of the MRP calculation could be
automatically converted to purchase requisitions.

Once a purchase requisition is created, an employee in the Purchasing department must turn it into a
purchase order. One of the important steps in creating a purchase order is choosing the best vendor to
supply the material. An integrated information system such as SAP can facilitate this process. Figure
below shows the Source Overview screen, which provides access to information that can help the
Purchasing employee select the vendor

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From this screen, the Purchasing employee can view information about each vendor, simulate the
price (the SAP system estimates the price from each vendor, which might include quantity discounts
and transportation costs), and look at the vendor evaluation— the company’s rating of the vendor. The
SAP ERP system can be configured to rate vendors based on a number of performance criteria,
including quality of goods provided and on-time delivery. The evaluation scores for each vendor are
updated automatically as materials are received. The integrated information system allows Purchasing
to make the best decision on a vendor based on relevant, up-to-date information.

Once the Purchasing employee decides which vendor to use, the purchase order is
transmitted to the vendor. The SAP ERP system can print out a paper order that can be
mailed to the vendor. More likely, however, the system will be configured to either fax the
order to the vendor, transmit it electronically through EDI (electronic data interchange),
or send it via email.

Detailed Scheduling
Finally, let’s examine the last portion of the production process, detailed scheduling. The aggregate
production plan for product groups developed in sales and operations planning is disaggregated to
individual products in finer time increments through the demand management process. In detailed
scheduling, a detailed plan of what is to be produced needs to be developed, considering machine
capacity and available labor.

A key decision in detailed production scheduling is determining how long the production runs for each
product should be. Longer production runs mean that fewer machine setups are required, reducing
production costs and increasing the effective capacity of the equipment. On the other hand, shorter
production runs can be used to lower the inventory levels for finished products. Thus, the production
run length requires a balance between setup costs and holding costs to minimize total costs to the
company.

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Providing Production Data to Accounting

The Receiving department must match the goods receipt with the purchase order that initiated it, to
make sure the exact materials ordered have been received, so Accounting can pay the vendor. It is
possible for the quantity of material entered in the goods receipt to differ from the quantity specified
on the purchase order. Depending on the configuration settings, the SAP ERP system might block
entry of the receipt if the discrepancy is too large. If the discrepancy is small, then the receipt may be
allowed, with the difference posted to the correct variance account, which allows the transaction to be
processed but maintains a record for management to review, to see if there is a consistent problem
with a vendor over shipping or “shorting” an order (consistently shipping less than was ordered).

When the receipt is successfully recorded, the SAP ERP system immediately records the increase in
inventory levels for the material. On the Accounting side of the system, this causes the value of the
inventory shown in the general ledger account to automatically increase as well. This is an important
feature of an integrated information system: the goods receipt is recorded once, but the information is
immediately available to both Manufacturing and Accounting and the information is consistent. An
integrated information system also has the ability to adjust for changes in material costs. If the cost
of the material changes frequently, the system can be configured to reevaluate the value of all the
inventory of the material that the company has.

ERP AND SUPPLIERS

Fitter is part of a supply chain that starts with farmers growing oats and wheat and ends with a
customer buying an NRG bar from a retail store. Previously, companies used competitive bidding to
achieve low prices from suppliers, which frequently led to an adversarial relationship between
suppliers and their customers. In recent years, more companies have begun to realize that they are part
of a supply chain, and if the supply chain is more efficient, all participants in the chain can benefit.
Collaboration can frequently achieve more than competition, and ERP systems can play a key role in
collaborative planning.

Working with suppliers in a collaborative fashion requires trust among all parties. A company opens
its records to its suppliers, and suppliers can read certain company data because of common data
formats. Working with suppliers in this way cuts down on paperwork and response times. Reductions
in paperwork, savings in time, and other efficiency improvements translate into cost savings for the
company and the suppliers.

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ERP lets companies and suppliers share information (sales, inventory, production plans,
and so on) in real time throughout the supply chain. This allows all parties to eliminate
from the supply chain costs that do not add value to the product (such as inventory,
overtime, changeovers, and spoilage), while simultaneously improving customer service.

The Traditional Supply Chain

The term supply chain describes all the activities that occur between the growing or mining of raw
materials and the appearance of finished products on the store shelf. The supply chain for Fitter’s
NRG bars starts with farmers growing oats and wheat, and it ends with a customer buying a bar from a
retail store. In a traditional supply chain, information is passed through the supply chain reactively, as
participants change their product orders— as illustrated in Figure below.

Because of the time lags inherent in a traditional supply chain, it might take week or even months for
information about Fitter’s increased need for raw materials to reach Fitter’s suppliers. Raw material
suppliers might require time to increase their production to meet Fitter’s larger orders, resulting in
temporary shortages for the supplier. And unusual events such as the “Oprah effect” (where a product
is endorsed by a famous name and causes a huge upsurge in demand) can also result in shortages. For
example, the Amazon Kindle quickly sold out after the famous talk-show host Oprah Winfrey claimed
it was one of her favorite items. By contrast, if the participants in the supply chain are part of an
integrated process, information about the increased customer demand can be passed quickly through
the supply chain, so each link in the chain can react quickly to the change.

EDI and ERP

The development of supply chain strategies does not necessarily require an ERP system. Before ERP
systems were available, companies could be linked with customers and suppliers through electronic
data interchange (EDI) systems. Recall from module 2 that EDI is the computer-to-computer
exchange of standard business documents (such as purchase orders) between two companies. A well-
developed ERP system, however, can facilitate supply chain management because the needed
production planning and purchasing systems are already in place. In addition, the integration of
accounting data in the ERP system (described in the next chapter) allows management to evaluate
changes in the market and make decisions about how those changes should affect the production
plan. With an ERP system, sharing production plans along the supply chain can occur in real time.
Using the Internet can make this communication even faster and cheaper than using private EDI
networks.

The Measures of Success

Performance measurements (sometimes referred to as metrics) have been developed to show the
effects of better supply chain management. One measure is called the cash-to cash cycle time. This
term refers to the time between paying for raw materials and collecting cash from the customer. In one
study, the cash-to-cash cycle time for companies with efficient supply chain management processes
was a month, whereas the cycle averaged 100 days for those companies without effective supply chain
management.
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Another metric is total supply chain management costs. These costs include the cost of buying and
handling inventory, processing orders, and supporting a company’s information systems. In one study,
companies with efficient supply chain management processes incurred costs equal to 5 percent of
sales. By contrast, companies without supply chain management incurred costs of up to 12 percent of
sales.

Other metrics have been developed to measure what is happening between a company and its
suppliers. For example, Staples, the office-supply company, measures three facets of the relationship.
Initial fill rate is the percentage of an order that the supplier provided in the first shipment. Another
metric is initial order lead time, which is the time needed for the supplier to fill the order. Finally,
Staples measures on-time performance. This measurement tracks how often the supplier met agreed-
upon delivery dates. Improvements in metrics such as these lead to improvements in overall supply
chain cost measurements.

• An ERP system can improve the efficiency of production and purchasing processes.
Efficiency begins with Marketing and Sales sharing a sales forecast. A production plan is
created based on that forecast and shared with Purchasing so raw materials can be
ordered properly.
• Companies can do production planning without an ERP system, but an ERP system that
contains materials requirements planning capabilities allow a company to link Production to
Purchasing and Accounting. This data sharing increases a company’s overall efficiency.
• Companies are building on their ERP systems and integrated systems philosophy to
practice supply chain management, a strategy by which a company looks at itself as part of
a larger process that includes customers and suppliers. Using information more efficiently
along the entire chain can result in significant cost savings. Because of the complexity of
the global supply chain, developing a planning system that effectively coordinates
information technology and people and that can help a company manage uncertainty is a
considerable challenge.

C. REFERENCE
Monk, E., & Wagner, B. (2012). Concepts in Enterprise Resource Planning (4th ed.). Cengage
Learning.

Prepared by:

RODEL P. LENON, MBA, LPT.

Instructor

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